Knowledge vs. Perception in financial planning


A Certified Financial Planner is a one of the most highly qualified professionals in the financial services industry. Certified Financial Planning is a technical qualification which focuses on the skills needed to prepare a comprehensive financial plan and assesses these skills against a case study.

Financial planners work with clients to help them invest their money. They may work for a bank, an insurance company or other financial institutions. To become a financial planner, one must undertake specific finance training and has to be accredited a recognized qualification as it is a highly regulated industry.

Financial planners help their clients set their financial goals, both short and long term, and then help achieve them. They will devise a financial plan that will meet their clients’ needs and rebalance it accordingly from time to time in line with the client’s financial goals. They will liaise between clients and the companies that they wish to invest in, and will often research these companies, providing detailed reports of their findings.

What are the role and duties of a financial planner?

A financial planner provides decision making support to the management in visualizing short term and long term objectives, assessing their viability and ensuring their fulfilment through continuous monitoring. Financial planning helps the management take important decisions pertaining to the profitability and the overall financial health of the organization. It also provides sufficient information to the management in envisioning future growth prospects. The basic elements of financial planning are forecasting, budgeting, reporting and analysis. It could also include other areas such as resource allocation, IT support, operations support and HR support. Each of these individual elements are subjects in themselves.

Reality Check

Ignorance and confusion regarding the nature of corporate growth and risk/return tradeoffs is not only common among those with growing enterprise value or those reviewing investment returns in view of related risks; finance professionals and scholars also struggle to remain grounded in these principles. Coming to reality, to check for financial planning knowledge, there was a poll conducted with 96 participants which had shocking results.

Most participants placed themselves in and “Above Average” category. Of the remaining participants, 60% people placed themselves in the “Below average” category and 40% placed themselves in the “No Knowledge at all” category. However, the fact remains that 80% of the participants actually fall under the “Below Average” category and only 20% actually fall into the “Above Average” category. Only a handful of the participants were actually part of the “Much above the Average” category.

No matter what the subject matter, debates stimulate people’s thinking. It creates opportunities for divergent views to be shared and enables people to indulge in many arguments before taking a call on a particular topic.

For those who are new to the industry, it is an opportunity to learn and expand your current knowledge of where the industry has come from and where it is going. Many of you may even go on to become significant contributors in shaping the direction of the industry as you gain experience and develop your careers. Starting to build your understanding now will stand you in good stead in the future.

Reasons for such a result

There can be a lot of reasons explaining this misrepresentation. We can certainly not point out the reason for a widespread misunderstanding, but we can surely analyse it. Here are a few of them:

  • Overconfidence and overestimation of knowledge. For example, some participant will argue about why not to take Term Insurance even though they are wrong but do not know it.
  • They have no idea about where others belong in the category.
  • They underestimate the process of financial planning; they think they can do it well even though they may not have the knowledge and/or experience.
  • We all know that this rat race in the present scenario is forcing one person above the other. This upward move is pushing them to believe they are something they are actually not. This belief makes them feel superior which leads to overconfidence, overestimation and higher expectation.
  • People are more surrounded by their own beliefs rather than their interaction and communication with others. Even if they come across someone above their mental strength, their overconfidence does not let them accept that and does not let them learn. This mentality continuously gives them the wrong feedback and an idea about the world around them, which makes them lose their perception.
  • The process of Financial Planning is not a child’s play. It is not a one-time activity, and needs constant reviewing and updating of one’s knowledge. Hence, only the person who has much experience and is in the know of things can excel in this field.

Effect of This Thinking

Most people live with the belief that Financial Planning is something they can do themselves without any professional help. Hence, more often than not, things go awry in the end. They do not understand the goal of Financial Planning.

It causes delay in the process of Financial Planning and hence causes the situation to become worse. They do not know whether or not a Financial Product suits them. It is a comparison between “Thinking” and “Reality”.

So why is Financial Planning required?

To summarize the points discussed above, a few important reasons why financial planning is required:

  • Envisioning the short-term and long-term objectives
  • Driving performances
  • Meeting and overachieving internal and external expectations
  • Timely identification and correction of financial or operational concerns
  • Strategic analysis
  • Identifying opportunities and providing decision support to capitalize them

Let us take American families as an example. The study reports that although 82% of Americans are optimistic about their financial futures, Americans in reality are not adequately saving or protecting their finances. From saving habits and financial goals, to life insurance coverage and retirement saving tools, Americans have a lot to do when it comes to protecting their financial futures. Americans cannot just “hope for the best”; they must take a critical look at where they are placed financially and lay out a clear roadmap that guides them to their hopes and dreams.

Some studies show the difference between Reality and Perception:

Savings Habits

Perception: Most Americans (82%) are optimistic about their financial futures.

Reality: Nearly four in 10, more than 77 million Americans, say that they live paycheck to paycheck and are not able to put money into savings.

Life Insurance

Perception: More than seven in 10 Americans are confident that they have sufficient life insurance.

Reality: Only 12% Americans report having the industry recommended coverage of seven or more times the family’s annual income.

Retirement Savings

Perception: Majority of Americans (58%) are not worried about outliving their retirement savings.

Reality: Many Americans are not utilizing a full range of retirement tools. Social Security is the most prominent source of retirement income over other retirement savings tools, with a fifth of Americans reporting that it is their only or main source of retirement income.


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